Diversify your portfolio with the structured notes

Hello,

This segment will go over the key features of deposit notes. In Canada, deposit notes are structured products issued by Canadian banks. They have seen strong growth since 2009, mainly because of low interest rates and investors' need for protection. Deposit notes are bank bonds whose yield is linked to an underlying asset. The underlying asset may be a stock index, a basket of securities, a natural resource or a currency.

There are two classes of deposit notes: Principal protected deposit notes and deposit notes whose capital is at risk.

Principal protected deposit notes are used to gain exposure to an underlying asset with a capital guarantee at maturity. They look a lot like the stock GIC offered at bank branches, but principal protected deposit notes do not offer deposit insurance. The principal and interest are guaranteed at maturity by the issuer. This is a promise to pay the bank.

The second category of the deposit notes is one with capital risk. These notes offer greater earnings potential than those with capital protection. In other words, they have greater exposure to an underlying asset. These notes can also be associated with partial protection mechanisms. Generally, the greater the protection; the lower the potential reward, and vice versa. These notes can offer tax benefits such as tax-efficient distributions. Of course, it is always important to seek advice from a specialist about this.

Generally, it is possible to trade deposit notes prior to maturity in the secondary market. The secondary market is maintained only by the issuer and may be limited so investors should always consider the possibility of having to hold their investment until maturity. One must therefore ensure that they have a sufficiently long investment horizon.

Before investing in a deposit note, some elements are worth considering.

For example, the performance of a deposit note will be linked to its underlying asset. However, for some deposit notes, the dividend yield is excluded from this calculation, which can create a significant difference between the performance of the underlying asset and the note associated with it. It is also important to check the guarantee or protection offered to ensure that it suits your risk tolerance before making a purchase.

No matter what type of guarantee is offered, it will apply only at maturity. The maturity date is equally important to when considering the guarantee, as the secondary market may be limited. Investors should always consider the possibility of owning this investment until maturity.

Finally, before you invest, you should read the offer documents available on the issuer's website. All relevant information will be included there.

We hope that you found this segment useful. We invite you to view our other segments on deposit notes.

Hello,

This segment is designed to explain a note with capital risk and which is callable. These securities are also called "autocall" notes.

For example, we will take a note that is refundable in advance (autocall) linked to the EuroStoxx50 index, with a maturity of 3 years. Here are the features.

The underlying asset is the EuroStoxx50 index. The coupon for year 1 is set at 8%, the coupon for year 2 is 16% and the coupon of year 3 is 24%. The barrier at maturity is 70% of the initial level of the index and the term of this note is 3 years.

Here is how an autocall note works. At the issue date, we measure the level of the index. This will be our starting level. The starting level here is set at 3800 and the barrier of 70% of the starting level will be 2660.

Now let's go to the first valuation date, which is the first anniversary of the note, and we will measure the level of the EuroStoxx50 index. If it is equal to or greater than 3800, the capital will be repaid to the investor, as will the coupon for the year 1, which is set at 8%.

If the index is below the level of 3800, we go to the second valuation date, and check again: Is the EuroStoxx50 index at or above the level of 3800? If so, the principal will be repaid to the investor as will a variable return of 16%. It is important to mention that when the note is redeemed by the issuer and that the variable return is paid, the note no longer holds any value.

If, at the second valuation date, the index level is below 3800, we would go to the third valuation date and check the level of the index again. If the final level of the index is at or above 3800, the principal is repaid as is a variable return of 24%, which was the coupon rate for the third year. If the index level is lower than 3800, but not less than 70% of the barrier of 2660, then the investor gets back their investment. If the final index level is below 2660 at the time they will receive the performance of the index. So if the index had lost 40%, for example, they would receive $60 for each $100 they had invested.

We hope that you found this segment useful. We invite you to view our other segments on deposit notes.

Deposit Notes

Hello,

This segment will explain the basics of deposit notes with distributions. These are deposit notes that include a risk to capital.

Let's start with an example of a deposit note with a fixed capital return. For this example, the benchmark is the S&P/TSX 60 and the note will pay a distribution of 2% each half, for a total distribution of 4% per year. The barrier is set at 70% of the initial level of the index, which is the S&P/TSX 60.

A fixed capital return deposit note is much like a bond. Therefore, the issuer absolutely must make the maturity payoff at a predetermined date.

Here we see an example which shows that there will be a return of capital payment every half regardless of the behaviour of our benchmark, the S&P/TSX 60.

Only at maturity do we test the barrier to see the final payoff of the note. If the index closes above the barrier which is 70% of the initial level of the index set on the issue date, the capital is repaid to the investor. The investor also keeps all the coupons that have been paid.

If the index finishes below the barrier, the investor will find themselves fully exposed to market risk, which is in this case the S&P/TSX 60.

Now let's look at an example of variable capital return note, which can also be called a contingent capital return note. Let's take a similar example, once again using the S&P/TSX 60, except that the distributions are now conditional. This means that at each distribution date, the index must be above the barrier level which is set at 70% of the initial index level, in order for us to receive that distribution.

Here is a chart of how a variable capital return note might behave in a neutral market scenario. You can see that all distributions are paid except for the sixth one, because the index fell below the barrier level. When the index again crosses the barrier level upwards, coupons, or distributions are again paid.

When we reach the maturity date, there will also be a barrier test of whether the capital will be repaid to the investor. As in the case of fixed capital return notes, if the index finishes below the barrier level, the investor would receive the return they would have gotten on the market and would be fully exposed to market.

It is important to look at the offer documents specific to each issue, as these can differ enormously both in terms of maturity payoff barriers as well as coupon distribution barriers. These vary, which can have a significant impact for investors.

We hope that you found this segment useful. We invite you to view our other segments on deposit notes.